It’s ‘impossible to deny Facebook’s momentum’

When it comes to Facebook Inc. and its blowout results, one early verdict is in: Get on board or get out of the way.

“With a premium valuation for Facebook and a lack of a ‘wall of worry’ to climb, we remain Sector Weight, but it is impossible to deny Facebook’s momentum,” wrote Pacific Crest analysts Evan Wilson and Tyler Parker.

The social media company
FB, -6.28%
dazzled Wall Street as it brought in more than $1 billion in quarterly profit for the first time. Fourth-quarter revenue shot up 52%, driven largely by ads, specifically mobile, the company said late Wednesday. And its monetization momentum kept going, with monthly active users (MAU) rising 6.5% year-over-year in the U.S. and Europe — and that’s where Facebook gets 75% of its revenue, noted the Pacific Crest analysts.

“Q4 results were good enough to make anyone sleep well, even during paternity leave,” quipped the analysts. That was a reference to Facebook Chief Executive Officer Mark Zuckerberg, who returned to work earlier this week after taking two months off to be with newborn daughter Maxima.

The analysts applauded something else that the “big blue app” has done well. “The explosion in spending that has torpedoed margins for so many Internet companies (recently and historically) has clearly not happened at Facebook. This discipline is unique,” they said.

Facebook’s operating margin, a measure that looks at how well a company controls costs, was up 2% year over year in the quarter, the analysts noted.

Keep margins controlled

Price growth for mobile and video ads should be strong, and Facebook’s ad load should ramp up significantly over the next year due to the recent addition of ads to Instagram, said the Pacific Crest analysts. But just how much the photo-sharing app has played in Facebook’s rapid growth is a big unknown.

While Pacific Crest analysts didn’t include a price target in their note, others bumped up their expectations in the wake of the earnings report. Morgan Stanley lifted its price target to $135 from $130. A team of analysts led by Brian Nowak applauded the strong advertiser demand and return on equity, user and engagement growth and a higher ad load, which fed into “strong core Facebook ad dollar growth.

“This is bullish as it speaks to potential higher overall monetization as the core continues garnering more ad dollars and Instagram (we believe) becomes a growing contributor throughout 2016,” said Nowak, who rates Facebook overweight. He added that Facebook Messenger, Facebook Audience Network, Oculus and WhatsApp are still “monetization irons in the fire for even larger long-term growth.”

Analysts at Susquehanna, which rates Facebook positive, upped their price target to $140 from $130 per share. At J.P. Morgan & Co. analysts lifted their price target to $136 from $127 as they stuck to an overweight rating.

Amid all the analyst love, there is one issue for Facebook investors to consider: is it worth the price? The company’s shares are trading at roughly 30 times earnings, said Wilson and Parker, the two Pacific Crest analysts. That’s relatively pricey compared with the S&P 500
SPX, -1.07%
which trades at 15.5 times earnings. “Sure it’s got a bright future, but we think investors could have a better opportunity, especially given incredibly high expectations for the stock,” they said, explaining their sector-weight rating.

None of the analysts who upgraded their price targets delved into that issue in their notes.

But iBank Coin blogger The Fly had a take on the issue.While shares are expensive, Facebook is “the only game in town,” he wrote. That is, of course, “if you’re interested in having exposure to the seemingly endless horde of zombies ... crashing their cars into walls of stone, just so that they could heart an Instagram picture or like someone’s inane Facebook status.”

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